Internet Sales Tax

[Savannahmann]

68. Here be the rub.

When you are audited, the onus of proving you haven't cheated, is on you. So you would have to provide to the State that is questioning you, and possibly every state every year, all your records, and prove that you haven't cheated on the taxes. Again, this is not too much of an inconvenience when you are dealing with one State, and you are in that state. It is a massive inconvenience when you are dealing with potentially fifty states, which could be six thousand miles from your current location.

Let's say you run a small business in Hawaii. You package and ship out Hawaiian stuff in addition to running the souvenir shop off Waikiki beach. So when someone in Iowa has a Hawaiian theme party, you supply the various stuff they need to hold their clever BBQ for friends and family. You submit that you had a sale in Iowa, and pay your sales tax for that one sale. Then Iowa refusing to believe that in the last three months, you have only had one sale in their state, demands that you prove you are not withholding sales tax from them.

They command that you or your representative appear in person in two weeks to see about this. You can hire a Lawyer in Iowa over the phone, but travel in person is a major annoyance.

Likely No. Possible? You bet. Probable? Not for every business, but for some of them you bet. When dealing with the Tax Collection offices of any Government, the burden of proof is always on the person filing the taxes, not the one collecting. When you file your income taxes, you have to include copies of your W-2, and interest statements, and any other earnings you have. To make sure you don't lie, those documents are sent to the IRS, to make sure it doesn't slip your mind. When you claim a deduction, you have to be able to prove that you are telling the truth, with receipts, and statements. Just saying you are a good businessman, and know where your money is, and where it came from, isn't good enough. You have to prove you did, or didn't do what they are interested in.

Wouldn't you say that such a scenario is possible? Where Iowa could think you have had more sales in their state? Are you suggesting that the State Department of Revenue will understand you aren't in Iowa, and leave you alone? Why? No legal reason to leave you alone, and every legal reason to demand compliance.

The more compliance costs, the less income taxes that will be collected. Remember, all those compliance costs are deductible. So when we see income tax collections drop, what will we do? If we follow form, we'll scream that people are cheating on their taxes, and screwing the people from the money they honestly owe the Government.

So lets say that the company making a million a year in sales, after deducting expenses, and the costs of compliance, pays more in sales tax, and far less in income taxes, because he's paying $25k a year in compliance costs. Accountants, and someone is certain to set up a fifty state legal representation system for this. So lawyers will get more money, accountants will get more money, and the states will get a little more in sales taxes collected, and less in income taxes collected. Those lawyers will not pay as much in taxes because they use every single loophole they can think of.

But in the end, if big business likes it, I am automatically wary.